This Question: 3 pts | 1 of 4 (0 complete) Mackenzie Company has a p ce of S31 a

Question

This Question: 3 pts | 1 of 4 (0 complete) Mackenzie Company has a p ce of S31 and will issue a dn dend of $2.00 next year. It has a beta 2 e sk-free rates 54%, and the market sk p a. Estimate the equity cost of capital for Mackenzie b. Under the CGDM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? a. Estimate the equity cost of capital for Mackenzie. m um-est met de b 4r% The equity st of capital for Mackenzie is % (Round to two decimal places.) b. Under the CGDM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? The expected growth rate for dividends is % (Round to two decimal places. Enter your answer in each of the answer boxes.

Explanation / Answer

a. Using the Capital Asset Pricing Model,

re = Risk-free rate + Beta(Market risk premium) = 5.4% + 1.2(4.7%) = 11.04%

b. The expected growth rate for dividends is:

$31 = $2 / 0.1104 - g

0.1104 - g = 0.0645

g = 4.59%

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